2nd January 2013
But fund managers are saying that the tax rises that have been agreed will still significantly dampen US growth.
For the moment, however, world markets are breathing several deep sighs of relief. Markets were also boosted by strong economic growth figures from China on Wednesday 2 January.
Both Houses of Congress have signed up to tax rises for the wealthiest, the continuation of Bush-era tax cuts for the middle classes and the postponement, for two months, of difficult spending cuts though that means more heated arguments are only a few weeks away.
For the rest of the world two things are important. First that the US appears to avoided a recession for now which would have had huge implications for the rest of the globe. Second that the US deficit will remain stubbornly high for a very long time to come with all the resulting implications for global economic imbalances.
But in the short term, investment experts are suggesting that a lot of damage has already been done with one condemning “pathetic, irresponsible horse-trading” of politicians.
Psigma chief investment officer Tom Beckett says: “As we were waking up with our hangovers yesterday morning, the US Senate was overwhelmingly agreeing to a deal that would restore some semblance of calm to the US economy. The 89 to 8 vote hid a lot of pain that had been created though and we would argue that the damage had already been done and the pathetic and irresponsible horse-trading over the agreement have once again shown the US politicians in a very bad light, including the respective party leaders and the President, himself. Indeed, if there was ever a pyrrhic victory in modern day politics it was this, although the President will doubtless claim victory, as there were tax-rises forced upon the wealthiest. For those more needy Americans there was an extension of the previous cuts for those earning up to $450k and maintenance of benefits for the unemployed. There were increases to both inheritance and investment income taxes, but the latter was not as harsh as we had feared possible.”
Psigma also believes that the tax rises which have been passed will cut economic growth.
Beckett adds: "US GDP will likely grow at a one per cent annualised rate in Q1 2013, down from 3.1% annualised in Q3 2012. This will be caused by the rise in payroll tax back to 6.2%, having been cut to 4.2% applicable last year.
"The expiration of the payroll tax cut could take $125m from consumers’ pockets. On a more positive note, the learned US investment banks believe, like we do, that the expansion will strengthen later in the year as the housing market continues to rebound. The package will reduce growth, but not eliminate it and once the dust has settled after this miserable episode, we hope that confidence and, by implication, growth can improve.”
Beckett is bullish for equities this year. But he adds that in the US "the scars will run deep and the rabid atmosphere amongst the US politicians has just got more poisonous. The biggest risk to markets in 2013 is the politicians and sadly the end of 2012 does not augur well".
Mike Turner, head of global strategy and asset allocation at Aberdeen Asset Management says that it is the decisions on government spending that remain key.
“While the consensus reached by the Democrats and Republicans has avoided a politically initiated crisis there is still much work to be done. The tax rises implemented are arguably only the small part of the equation. The real tough decisions centre on government spending.
“The US deficit remains too high and despite the interest charged being extremely low action needs to be taken to address the unsustainable growth in federal debt. Spending cuts are required but need to be balanced with incentives encouraging companies to invest some of the huge sums of cash on their balance sheets. In its simplest form this means certainty over the longer term fiscal and growth outlook.
“Until a long term plan is agreed which reduces the annual budget deficit to less than 3% of GDP, investors are likely to remain nervous.”